Europe close: Stocks rebound from two-month low after US inflation report

(Sharecast News) - European stocks advanced on Friday, bouncing off a two-month low, as falling oil prices provided some relief following a recent surge, while investors focused on interest rate projections following a key inflation reading in the States.

The pan-European Stoxx 600 index rose 0.5% to 639.10, with solid gains across the continent and a 1.4% surge in Milan. The Stoxx 600 had settled at 635.97 on Thursday - its lowest close since 8 July.

"Investors were in a more bullish frame of mind today when compared with earlier this week. They rushed in to buy and take advantage of a wide-ranging equity sell-off, as oil prices pulled back a touch after adding over 25% in under a fortnight," said David Morrison, senior market analyst at Trade Nation.

Stocks were given a boost by a positive start on Wall Street, after an in-line inflation report gave investors some clarity ahead of next week's Federal Reserve meeting, where an interest-rate hike is all but certain.

The headline US inflation rate held steady at 3.4% in August, matching July's reading and the consensus forecast. Core inflation, which excludes food and energy costs that can be volatile month to month, eased to 2.4% in August from 2.5% in July.

The recent escalation in the Middle East conflict had sparked another surge in energy prices over the past week, increasing expectations that the Fed may act next week to stop inflation from getting out of control. Markets are now pricing in a 90% chance of a 25 basis-point rate hike next week, up from 70% before the data.

Investors were still digesting Thursday's move by the European Central Bank to raise interest rates by 25 basis points to 2.5%.

"There's also a feeling that [the ECB] may look to raise rates further, possibly at their next meeting at the end of next month. Despite this, European indices have bounced back [...], with many having made back yesterday's losses, and more," Morrison said.

In equity news, shares in Berkeley fell as the UK house builder said market activity has been further impacted by the ongoing conflict in the Middle East and political uncertainty, with buyers "more cautious to commit". The firm said it was mindful that prospective purchasers may defer transactions until after the Autumn Budget statement at the end of October.

Tech stocks performed well, rebounding after recent volatility, with Infineon and Logitech among the best performers on the Stoxx 600.